Environmental, Social and Governance (ESG) issues such as climate change, natural resources protection, harmful labor practices, employee diversity and leadership ethics have captured the attention of individuals and communities around the world. As this focus intensifies, businesses and organizations are realizing that effectively addressing ESG considerations is important for ensuring both a positive future for the planet and their own long-term success.

It is becoming increasingly clear that ESG factors can have a significant impact on a company’s bottom line. A 2023 McKinsey and NielsenIQ study found products that claimed to be environmentally and socially responsible averaged 28-percent cumulative retail sales growth over five years, compared to 20-percent growth for products that made no such claims.

As awareness of ESG issues continues to grow, investors, consumers and employees are looking to do business with companies that prioritize sustainability and ethical practices. A PwC survey found 83 percent of consumers believe companies should actively shape ESG best practices. This direction makes it crucial for firms to incorporate ESG principles and reporting into their operations.

The ESG reporting landscape can seem like a confusing, convoluted acronym soup with standards and frameworks such as CSRD, IFRS and ESRS. But over the decades, ESG reporting has shifted from a useful tool for companies looking to attract ESG-conscious investors to a requirement, as regulators and communities begin to seek concrete ESG information from organizations. 

As a result, measuring and reporting ESG data is becoming a key responsibility for accountants and auditors, creating new and exciting opportunities for those wanting to advance their careers or expand their firm’s business.    

ESG reporting can encompass the following:

• Environmental: Sustainability, greenhouse gas emissions, pollution control, energy use, use of water and other natural resources
• Social: Fair pay and treatment of employees, health and safety policies, community engagement
• Governance: Corporate policies, investor rights, corporate management (including the pay of senior executives), transparency in communications 

Accountants and auditors, with their expertise in measuring and compiling financial data, are pivotal in monitoring ESG activities. Their duties range from reporting and assurance to business planning, governance and risk assessment. But no matter their role, accountants will increasingly need to stay informed about new developments and trends in ESG regulations and requirements.

The rise of ESG

The focus on ESG reporting for organizations has grown rapidly in recent years, but the concept of ESG has existed for decades. As far back as the 1970s, some investors began to prioritize companies committed to ethical and sustainable business practices as part of the socially responsible investing movement.

ESG grew in popularity in the early 2000s as society became more concerned about environmental deterioration and social issues, such as unsafe labor practices and human rights violations. In 2006, the United Nations created the United Nations Principles for Responsible Investment (UNPRI), a set of principles designed to create a global standard for responsible investing. The UNPRI included guidelines to incorporate ESG components into investment decisions. 

Over the last several years, various factors have boosted the importance of ESG for accountants and auditors. These include regulatory requirements, stakeholder expectations, risk management and competitive advantage.

Governments and regulators worldwide require organizations to report their ESG performance. Some examples include:

• The European Union has multiple regulations, including the Corporate Sustainability Reporting Directive (CSRD), which requires EU-listed companies to report on various ESG-related topics, and the Sustainable Finance Disclosure Regulation (SFDR), which is designed to increase transparency about the impacts of investments in sustainability.
  
• The U.K. has the Sustainability Disclosure Requirements to increase transparency around companies’ ESG practices.
  
• Germany has the German Supply Chain Due Diligence Act, which requires large companies to meet environmental and social standards throughout their supply chains.
  
• In the U.S., the Securities and Exchange Commission passed rules that require public companies to disclose any climate-related risks that could have a material impact on their business. 

And these are just a few examples of the expanding international ESG regulatory environment.

Stakeholders, such as investors, employees, customers and communities, are increasing pressure on organizations to disclose their ESG performance. These stakeholders expect organizations to be transparent and reliable in their ESG reporting. Meeting or exceeding their expectations can benefit an organization’s reputation and financial performance.

The rise in climate-related disasters, such as floods, droughts and wildfires, has shown that ESG factors can pose significant risks to a company’s financial performance. Building ESG risk into audit and accounting processes can help companies better detect and manage potential problems while reassuring investors. 

Today, 90 percent of S&P 500-listed companies release ESG reports. Eighty-nine percent of investors consider ESG issues in some form when making investment decisions, according to a study from asset manager Capital Group. Global ESG assets surpassed $30 trillion in 2022 and are on track to exceed $40 trillion by 2023, reported Bloomberg Intelligence. 

Companies that report transparently on their ESG performance can gain a competitive edge over their competitors because they appeal more to ESG-aware customers, investors and employees. Demonstrating a responsible attitude towards ESG can improve access to capital, help companies attract top talent and sell more products and services.

Corporate ESG reporting

Traditional financial reporting tracks profit, revenue and sales metrics to inform investors and other stakeholders about an organization’s financial performance. ESG reporting, on the other hand, focuses on a broader range of non-financial factors tied to environmental, social and governance issues. ESG reports are also designed to appeal to a broader audience, including stakeholders, consumers, community members, employees and regulators.

ESG reports can include a wide range of information, depending on what regulations an organization needs to meet and which ESG measures its stakeholders value. All annual ESG reports will have information about an organization’s efforts to reduce its environmental impact or improve its social responsibility through critical metrics, goals and initiatives. They can also incorporate particulars about organizations’ challenges in meeting their goals and how they plan to overcome them.

ESG report components can encompass the following:

• energy consumption and greenhouse gas emissions
• water usage and wastewater management
• diversity and inclusion statistics
• supplier diversity and responsible sourcing practices
• community engagement and social impact initiatives
• governance structure and board diversity
• executive compensation policies and practices

Integrating relevant ESG data into an organization’s accounting systems is vital to producing accurate ESG reports. To decide which key ESG metrics to track, companies typically form a governance board. The company can then collect relevant ESG data, verify its accuracy and incorporate that data into a report for stakeholders.

Read more about ESG reporting in our latest white paper, ESG Reporting: Challenges and Opportunities for Accountants and Auditors.